Singapore: This is the correct time for the rich to enter the market

Singapore housing prices continue to fall -but (on the other hand) demand is rising strongly. Homebuilder sentiment is also improving, after a partial relaxation of market-cooling measures.

The private residential property index fell by 2.77% during the year to Q1 2017, its thirteenth consecutive quarter of y-o-y price falls, according to the Urban Redevelopment Authority (URA). When adjusted for inflation, house prices actually fell by 3.45% during this period.

In the Rest of Central Region (RCR), property prices were down by 2.5% (-3.2% inflation-adjusted) over the same period.

In Outside Central Region (OCR), property prices fell by 2%(-2.6% inflation-adjusted) during the year to Q1 2017.

Prices of high-end, non-landed homes fell slightly by 0.2% q-o-q in Q1 2017, to an average of SGD2,254 (US$1,631) per square metre (sq. m.), according to Savills.

The continued decline in house prices is the result of deliberate government policy. Before and after the global economic crisis, Singapore’s property market surged, and Singapore experienced an amazingly overheated market. The residential property price index rose 38.2% during the space of only one year to Q2 2010 (34% inflation-adjusted).

The Singapore government sensibly began to take steps, and when these turned out to be not enough, took further measures.

In October 2012 it limited the mortgage term to 35 years, and lowered loan-to-value (LTV) ratios to 60% for loans longer than 30 years (or loans stretching beyond age 65). This was only the first of 10 rounds of property-market cooling measures.

Seller’s stamp duty (SSD) was then introduced on owner-occupied housing sold within a year of purchase. A little later, the stamp duty was revised upwards, with sakes of owner-occupied houses taxed sold within a year of acquisition taxed at 16% of sale price. Then the holding period was increased from one year to four years. In subsequent rounds, LTV ratios were lowered and minimum cash down payment increased.

Despite these measures, property prices kept surging. In the sixth round, new residential loans were capped at 35 years, with existing loans over 35 years facing tighter LTV ratios. In the seventh round the government revised the additional buyer’s stamp duty (ABSD), increasing rates from 5% to 7% for Permanent Residents’ (PRs) first residential property purchase, and Singaporeans’ second residential purchase.

This resulted in a 23.5% decline in sales transactions within a year, but prices continued to surge till the end of 2013.

Eighth, ninth and tenth rounds of market-cooling measures followed.

These market-cooling measures have been effective, as evidenced by the 11% decline in property prices in the past three years.

Effective March 11, 2017, the government introduced a partial relaxation of its market-cooling measures, as a response to calls to lift these curbs amidst slow sales activity and weak economic growth.

Stamp duty is now payable by sellers after three years of purchase, down from four years, and the rate is cut by 4% for each tier. The new rates range from 4% for properties sold in the third year after purchase, to 12% for those sold in the first year.

The total debt servicing ratio is also eased. The requirement that loan obligation cannot exceed 60% of gross monthly income is no longer applicable for mortgage loans with loan-to-value (LTV) ratios of 50% and below.

“The policy relaxation is likely to be seen as the beginning of the unwinding of cooling measures and this is expected to lead more buyers back to the market,” said Mr. OngTeckHui of Jones Lang LaSalle (JLL). “Buyers would perceive the market as bottoming and be hopeful of a price recovery.”

As a result, market sentiment has improved, as evidenced by a strong increase in demand. New private residential units sold more than doubled in Q1 2017 from a year earlier, to 2,962 units, according to the Urban Redevelopment Authority. Though, other factors, such as low interest rates and relatively more affordable property prices, have also contributed to the recent sharp increase in sales.

Despite the policy reversal, many local property experts believe that a broad-based easing of property market curbs remains unlikely in the near term.

“It’s a calibrated step-by-step approach that the Government is adopting so as not to unravel the stabilization efforts that have (borne) fruit over the last three years,” said Eugene Lim of ERA Realty Network Singapore. “I do not think further easing will come so soon.”

Singapore’s housing market is expected to improve further in the coming months, as many investors are being lured back into the market, according to some local property experts.

“With improvements in transaction volumes and prices of different marketsegments showing a mix of mild increases or decreasesgenerally, the private home sales market appears headedtowards a bottoming in the next few quarters, providedsentiments remain positive and barring major external shocks,” said OngTeckHui.

Singapore´s economy expanded by a modest 2.5% in Q1 2017 from a year earlier, according to the Ministry of Trade and Industry. The economy is expected to grow by 2.2% this year, after expanding by 2% in 2016, 1.9% in 2015, 3.6% in 2014, 5% in 2013, 3.9% in 2012, 6.2% in 2011, and 15.2% in 2010, according to the IMF.

Regional property price variations

These are the prices of some major residential developments (based on a Savills report):

At The Clement Canopy, located inClementi Avenue 1, OCR, prices range from SGD1,187 (US$859) to SGD1,501 (US$1,086) per sq. m. in Q1 2017

In Grandeur Park Residences, located in Bedok South Avenue 3, OCR, prices range from SGD970 (US$970) to SGD1,592 (US$1,152) per sq. m.

In the Rest of Central Region, sales more than doubled in Q1 2017 from a year earlier, to 1,509 units.

In Outside Central Region, sales surged 92% y-o-y to 2,964 units over the same quarter.

Interest rates are very low

Interest rates on housing loans have fallen significantly since the late ‘90s. From an average of 8.07% in 1998, interest rates on 15-year housing loans dropped to 2.93% in 2014.

Interest rates on 15-year housing loans increased to 3.22% in 2015 and to 3.41% in 2016. However in April 2017 the average housing loan was back down again at 3.16%, according to MAS.

Singapore’s prime lending rate has been generally stable in the past 16 years. Currently, the prime lending rate is 5.28%, from 5.35% since January 2014, and previously from 5.38% since January 2008. As a bank’s best (prime) customers like large corporations are relatively inelastic to interest rate changes, tweaking the prime lending rate has a miniscule impact on inflation. Thereforethe prime lending rate is kept stable.

On the other hand, housing loan interest rates, though priced in relation to the prime lending rate (PLR), are tweaked more often to rein in inflation, as housing borrowers are more sensitive to interest rate changes, and the change in their demand for funds has a considerable impact. Variable interest rate mortgages dominate Singapore’s market, so that interest rate changes can have a rapid and dramatic effect on households with mortgages.

Tweaking the rate on mortgages, plus government restrictions on land use and ownership, has helped pre-empt a housing boom despite sharply lower interest rates over 8-9 years.

Singapore’s mortgage market is one of the most developed in Asia. It expanded sharply during the past two decades, rising from approximately 8% of GDP in 1990, to 15% of GDP in 1996, to 27% of GDP in 2006, and to 46.8% of GDP in 2016. Outstanding housing loans were up 4% during the year to April 2017, to SG$193.35 billion (US$139.94 billion), according to the Monetary Authority of Singapore (MAS).

The Singapore government has other weapons in its armoury. It also controls supply and zones land use through Government Land Sales (GLS) tenders. In addition, the Singapore Land Authority (SLA) restricts foreign ownership of landed property.

Yields are very low, too

The weak demand for homes-for-sale in recent years has had a spillover effect on the rental market, as unsold housing inventory competes with existing rental stock for a limited pool of existing tenants. On the demand side, expatriate arrivals are down, due to tighter immigration policies.

For high-end Singapore Centre condominiums yields remain poor, at around 2.5%, according to research conducted by Global Property Guide in May 2016. Yields are a little higher on smaller apartments than large ones, as is typical in most property markets. But those yields alone would not be a reason for owning property in the country.

These figures are supported by recent report released by Orange Tee Consultancy. Average rental yields for private condominiums in Singapore range from a minimum of 2.9% in Core Central Region to a maximum of 3.2% p.a. in the Rest of Central Region. In Outside Central Region, gross rental yields have fallen to just 3.3%, from 3.9% in 2012.

In Q1 2017, the rental index of private all-residential properties fell by 0.9% from the previous quarter, according to the URA. Over the same period, rental index of landed private residential properties fell by2.3% q-o-q while it dropped by 0.7% q-o-q for non-landed properties.

Rents in all three regions fell during the year to Q1 2017:

rents fell by 2.34% y-o-y in Core Central Region

rents fell by 2.5% y-o-y in the Rest of Central Region

rents fell by 5.2% y-o-y in Outside Central Region

This was supported by figures released by Jones Lang LaSalle, which showed that gross rents in the country’s luxury prime market fell by 1.3% q-o-q in Q1 2017.

“We expect rents for non-landed properties to ease further, although rents of choice developments in prime districts and growth clusters are likely to remain resilient,” said Edmund Tie & Company in its Q1 2017 report.

Other developments with modest rental yields of an average of 4.3% included Kerrisdale in Kallang, [email protected] in Downtown Core, Glentrees in Bukit Timah, Icon in Downtown Core, Melville Park in Tampines, and Loyang Vallet in PasirRis.

Since 2014 many accessible and spacious condominiums have been built in the Outside Central. Many expatriates have relocated from Core Central Region to suburban and fringe areas in Outside Central Region, according to Joseph Tan, CBRE´s executive director (residential).

“Nevertheless, there is still this crème de la crème of senior management and business owners who are inelastic to rental increases and where uber high-end, luxury residential remains their only choice of residence. Core Central Region was meant for the deep-pocketed expatriate. For this category of tenants, only a select number of developments in the Draycott, Claymore and Nassim areas would meet their needs and hence rents in these developments are unlikely to budge from their elevated levels”, said Savills Research.

Singapore has a small private rental sector, mostly serving expatriates. In the local sector 81% of all rental units are owned by the HBD.

99-year leasehold properties have the highest rental yields in Singapore because of their lower prices relative to other types of properties.

“As tenants are generally not concerned about the tenure of the property, leasehold properties tend to have an advantage as compared to freehold when looking purely at rental yields,” said Orange Tee Consultancy.

Homebuilders’ sentiment improving

In 2016, there were about 7,877 uncompleted private residential units launched in Singapore, up from 7,056 units in 2015 and 7,693 units in 2014, but still far below the 15,885 units launched in 2013, and 21,478 units in 2012, according to URA. The upward trend continued in the first quarter of 2017, with the number of uncompleted private residential units launched surging by 104% y-o-y to 1,949 units.

Homebuilder sentiment is noticeably improving, mainly due to the strong increase in demand since last year, coupled with the partial relaxation of market-cooling measures. “With hearty sales coming from recent launches in the high-end market, developers are regaining confidence,” said Savills.

“Therefore, in the coming months, developers are expected to ride on the momentum of improving buyers’ sentiment to launch or relaunch their projects in the prime districts. These high-end projects may include GuocoLand’s Martin Modern in River Valley, City Developments Limited’s New Futura at Leonie Hill and Bukit Sembawang’s condominium development at St. Thomas Walk.”

Planned development also declined by 35.4% y-o-y to 4,325 units in Q1 2017.

In Q1 2017, there were a total of 352,310 housing units available in Singapore, up by 6.7% from the same period last year, according to URA. Of which, 323,868 units are occupied while the remaining 28,442 units are available, making up a 8.1% vacancy rate (down from 8.4% in the previous quarter but up from 7.5% a year earlier).

Foreign demand is crucial

Singapore now has the sixth-highest percentage of foreigners in the world: about 38% (2 million) of Singapore’s population are foreigners. Of these 10% (o.54 million) are permanent residents, and the remaining 28% (1.46 million) expats.

Tighter immigration rules are being imposed by the government, due to strong popular disquiet. Beginning 1 September 2015 work pass holders need to meet a minimum fixed monthly salary of SG$5,000 (US$ 3,630) to sponsor the stay of their spouse/ children here (on Dependant’s Pass) and a minimum fixed monthly salary of SG$10,000 (US$7,260) to sponsor the stay of their parents here (on Long Term Visit Pass).

Despite this, residential properties purchased by foreigners rose by 19.4% to 1,067 units in 2016 from a year earlier, according to OngKahSeng of R’ST Research. Likewise, purchases by permanent residents (PRs) also increased by 14.1% y-o-y to 2,906 units over the same period.

Foreign investments in Singapore’s real estate market soared to SGD5.7 billion (US$4.1 billion) in 2016, a more than fivefold increase from a year earlier, on the back of mega deals such as Qatar Investment Authority´s purchase of Asia Square Tower 1 for SGD3.38 billion (US$2.45 billion). Excluding the Asia Square deal, foreign investments in real estate still surged 117% from SGD1 billion (US$760 million) in 2015 to SGD2.27 billion (US$1.65 billion) in 2016.

The Kingsford Hillview Peak, near the Hillview MRT station, and the Cairnhill Nine, located in the Orchard Road district are among the most preferred residential projects among PRs and foreign homebuyers.

Mainland Chinese buyers, Malaysians, Qataris, Indonesians and Indians make up the largest groups of non-Singaporean homebuyers in the country.

Singapore citizens and Singapore Permanent Residents pay a lower additional buyer’s stamp duty on residential property acquisitions than foreigners, depending on the number of properties owned. For Singapore citizens and Singapore Permanent Residents, the maximum rate of additional buyer seller duty is 10%. For foreigners it is a flat rate of 15%.

US citizens are however treated the same as Singapore citizens under the US-Singapore Free Trade Agreement, that is, no additional buyer’s stamp duty is payable on the first Singapore residential property purchase.

“Prices are still at a low point and there are a lot of savvy, rich people on the lookout for good investment opportunities to take a position just before the market turns. This is the correct time for the rich (to enter the market),” said Mr. George Tan Senior Director, Savills Residential.

Modest economic growth, rising unemployment

The economy is expected to grow by 2.2% this year, after expanding by 2% in 2016, 1.9% in 2015, 3.6% in 2014, 5% in 2013, 3.9% in 2012, 6.2% in 2011, and 15.2% in 2010, according to the IMF.

In the first quarter of 2017, unemployment stood at 2.2%, unchanged from the previous quarter but up from 1.9% a year earlier and from an average unemployment rate of 2% in 2010-2014, according to the Ministry of Manpower (MOM). Unemployment among Singaporeans increased from 2.6% in Q1 2016 to 3.5% during the latest quarter, and from 2.7% to 3.2% among Singapore residents. Long-term unemployment rate rose slightly from 0.7% to 0.8% over the same period.

Inflation rose by 0.4% in April 2017, down from 0.7% in the previous month but up from -0.5% in April 2016, according to the Department of Statistics Singapore. Inflation was -0.5% in both 2015 and 2016, 1% in 2014, 2.4% in 2013, 4.6% in 2012, 5.2% in 2011. It is estimated that inflation will be 1% in 2017, according to the IMF.

The country’s central bank, the Monetary Authority of Singapore, has maintained a tight monetary policy in since April 2010, allowing a “modest and gradual” appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) policy band. However in April 2016, the central bank decided to abandon the previous policy and set the rate of the Singapore dollar’s appreciation to zero percent, in an effort to buoy economic growth against a dimmer global economic outlook.

“This is not a policy to depreciate the domestic currency, and only removes the modest and gradual appreciation path of the S$NEER policy band that was in place,” the MAS reports.

The average exchange rate in May 2017 was USD1 = SGD1.3925, slightly down from USD1 = SGD1.3698 in the previous year.

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